The Chinese Multi- Facility Economic Zone

(1)

The Chinese

Multi-Facility Economic Zone

in Zambia

A way of escaping the resource curse?

A.M. Dijkstra

(2)

Introduction

Africa is often referred to as ‘the lost continent’. After independence, most countries plunged into decades of civil war, famine and economic crisis. This dramatic performance is often explained by either external factors, such as the effects of European colonization, or by internal issues, as the lack of democracy in African states.1 On the one hand, scholars hold external interference such as the colonial legacy responsible for Africa’s poor performance. This school of thought states that the economic, political and social structures that are currently weak and hinder development in Africa were historically destabilized by European interference.2 On the other hand, researchers point to internal problems, such as the form of governance, because they see a correlation between poverty alleviation and democratic government.3 The lack of democracy, primarily caused by internal rather than external factors, is perceived as an essential reason for the underdevelopment of Africa. In the nineties, another possible explanation for Africa’s disappointing performance was added to the debate and shifted the attention from colonization and democracy to another variable: natural resources. Jeffrey Sachs and Andrew Warner found a confusing correlation between natural resource abundance and low economic growth, which might also explain the lack of development in Africa.4 The continent possesses an abundance of resource-wealth, which in most cases has not been converted into economic benefits. According to these scholars, those resource-rich African countries fell victim to the so-called ‘resource curse’.5

Although a negative correlation has been found between natural resources and economic growth, there is no consensus on what causes this phenomenon.6 There is no straightforward explanation why most resource-rich countries experience lower growth than countries that have no natural wealth. It seems to depend on a country’s characteristics whether it is prone to the

1

John M. Luiz, ,"The wealth of some and the poverty of Sub Saharan Africa", International Journal of

Social Economics 33 (2006) 625 – 648.

2_{Tirfe Mammo, The Paradox of Africa’s poverty: the role of indigenous knowledge, traditional practices and local}

institutions – the case of Ethiopia (The Red Sea Press Inc.: Asmara, Eritrea 1999) 24.

3

Olantunji A. Oyeshile, “Poverty alleviation and democratic governance in Africa”, Journal of Sustainable

Development in Africa 11 (2009) 68.

4_{Jeffrey D. Sachs and Andrew M. Warner, “Natural resource abundance and economic growth”, Center for} International Development and Harvard Institute for International Development, Harvard University, Cambridge MA (1997), http://www.cid.harvard.edu/ciddata/warner_files/natresf5.pdf, visited on October 15, 2011.

5_Ibidem.

(5)

resource curse or not.7 Although the curse was at first seen as an economic problem, the main causation seems to be political. Corrupt political elites cause to economic mismanagement which in turn leads to ineffective use of natural resources: the resource curse.8

Escaping this resource curse would be possible when a country starts to effectively use its resources and diversifies its economy, to ensure not everything depends on the wealth that resources generate.9 This requires changes in economics and politics that can hardly be brought about by most weak African governments. However, the past decades have shown that external help, such as Western aid, has not been very effective in getting African countries out of the resource curse either.

Not everybody sees Africa as a lost continent. Over the past decade investments from China have increased enormously. China has been present in Africa for some time, but recently investments and trade have increased remarkably. In 2000 trade between China and Africa amounted to US$10 billion. In 2005 this had risen to US$39.8 billion and in 2006 to US$55 billion.10 In 2010 trade doubled to almost US$115 billion.11 This makes China Africa’s largest trading partner.12 Chinese Foreign Direct Investment (FDI) in Africa is also increasing rapidly. In 2006 900 Chinese companies had settled in Africa with an overall investment of US$6 billion.13 At the end of 2009 total Chinese investments were estimated at US$9.3 billion.14

African countries welcome this alternative donor. China is regarded more as an ally than the traditional donors, because historically the country has never been a colonizer and instead supported African independence-movements in the colonial era. China associates itself more

7

Andrew Rosser, “The political economy of the resource curse: a literature survey”, Institute of Development Working Paper 268 (2006) 3,

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.167.1124&rep=rep1&type=pdf, visited on October 15, 2011.

8

Moin Siddiqi, “Turning the resource curse into a blessing”, African business (2011) issue 374, 44-45. 9_Ibidem.

10_{Serge Michel and Michel Beuret, China Safari: on the trail of Beijing’s expansion in Africa (New York: Nation} Books , 2009) 13.

11

David Smith, “China says booming trade with Africa is transforming continent” The Guardian (December 23, 2010), http://www.guardian.co.uk/world/2010/dec/23/china-africa-trade-record-transform, visited on October 29, 2011.

12

(6)

with Africa by claiming it is still a developing country itself.15 China operates outside Westernized institutions such as the World Bank, IMF, OECD and the Paris club. Moreover, China’s approach is quite different from the Western way, which did not bring much change to Africa so far. China employs a strict interpretation of the principle of sovereignty and does not interfere with internal affairs.16 Western countries attach severe conditions regarding democracy and good governance to their investments, but the Chinese only ask for the recognition of Taiwan as a Chinese province. As a result, China operates much quicker than the West because it is not bothered with lengthy procedures and checking institutional conditions.17 Furthermore, China does not only trade in money; it also trades in a more tangible form. For example, a contract was signed with the Democratic Republic of the Congo (DRC) that granted China a certain amount of resources, in exchange for Chinese funding of a number of infrastructural projects in the DRC.18 This way of trading minerals for what Africa desperately needs, infrastructure, is typical for the Chinese way of investing in Africa.

China’s ‘commodity safari’ through Africa has aroused many negative reactions, mainly in the Western world.19 Chinese involvement with pariah’s as Zimbabwe and Sudan is heavily criticized.20 Chinese actions are described as a new form of colonization. The West complains, but in fact Western aid has not brought African countries closer to significant economic success. Could Chinese investments be the solution? Africa has been ‘underinvested’ for a long time, because of the riskiness and uncertainties around projects.21 The Chinese however are not afraid to take the risk and provide Africa with the FDI that it is longing for.22 Can this influx of money bring economic development to the continent? Moreover, the alternative form of investing could

15_{Martine Dahle Huse and Stephen L. Muyakwa,”China in Africa: lending, policy space and governance”,} published by Norwegian Campaign for Debt Cancellation and Norwegian Council for Africa (2008) 12-15, http://www.eurodad.org/uploadedFiles/Whats_New/Reports/China_in_Africa.pdf, visited on October 25, 2011. 16_{Erik Meyersson, Gerard Padró I Miquel and Nancy Qian, “The rise of China and the natural resource curse in} Africa”, unpublished paper (2008), 2, access via WorldBank

http://siteresources.worldbank.org/INTMACRO/Resources/June5&62008MGConferencePAPERQIAN.pdf, visited on October 29, 2011.

17_{Huse and Muyakwa, “China in Africa”, 12-15.}

18_{NRC, “Congo versobert deal met China onder druk van IMF” (August 20, 2009),}

http://vorige.nrc.nl/economie/article2334364.ece/Congo_versobert_deal_met_China_onder_druk_van_IMF , visited on October 25, 2011.

19_{Sanusha Naidu and Martyn Davies, “China fuels its future with Africa’s riches”, South African Journal of}

International Affairs 13 (2006), 67-83.

20

Huse and Muyakwa, “China in Africa”, 5. 21_{Ibidem 10.}

(7)

lead to additional benefits. Investing in infrastructure could for example diminish corruption: it is harder to make a police station disappear than a million dollar in cash.23 Chinese investments are mostly done in resource-rich countries that are trapped in the resource curse. Less corruption and economic diversification, possible effects of Chinese involvement, could get countries out of this curse.

Zambia is a great example of a country that suffers from its abundance of resources and faces Chinese involvement which seems to be beneficial for economic growth. The landlocked country in sub-Sahara Africa became independent in 1964 and its huge reserves of copper and other metals were expected to bring economic prosperity to the newborn state.24 However, Zambia turned out to be a textbook example of the resource curse. Its undiversified economy led to underdevelopment and made Zambia one of the world’s poorest states.25 Recently, the tables have turned. Zambia has experienced economic growth since 1999, with a growth rate of 6.8% in 2010, and inflation dropped from 30% in 2000 to 7.9% in 2010.26 In 2011 the World Bank reclassified Zambia as a middle-income country.27 This change mainly correlated with the rise of the copper price and the cancellation of more than US$6.6 billion of debt, but was also

accompanied by growing Chinese investments.28

China’s involvement in Zambia is not new. When Zambia was still a British protectorate, China supported the opposition.29 Chinese engagement at this time was mainly politically and ideologically driven.30 When China introduced its ‘open door’ policy in the late seventies, Zambia also became an interesting partner on an economic level. Since the beginning of the twenty-first century, Chinese investments have really taken off. Between 2002 and 2009 an

23_{David van Reybrouck, Congo: een geschiedenis (de Bezige Bij: Amsterdam, 2010) 555.} 24_{Huse and Muyakwa, “China in Africa”, 31.}

25

Dominik Kopiński and Andrzej Polus, “Sino-Zambian relations: ‘an all-weather friendship’ weathering the storm”, Journal of Contemporary African Studies 29 (2011), 182-183.

26_{Bureau of African Affairs, “Background note: Zambia” (October 17, 2011), U.S. Department of State,} http://www.state.gov/r/pa/ei/bgn/2359.htm, visited on October 29, 2011.

27

Lusaka Times, “World Bank gives Zambia middle-income ranking” (July 14, 2011),

http://www.lusakatimes.com/2011/07/14/world-bank-zambia-middleincome-ranking/, visited on October 28, 2011. 28_{Huse and Muyakwa, “China in Africa”, 9.}

29

(8)

average of US$651 million of FDI per year flowed into the country.31 Zambia is the third largest recipient of Chinese investments in Africa, after oil-rich Angola and Sudan.32 More than 200 Chinese companies are operating in Zambia and although they focus mainly on mining, they are also involved in agriculture, manufacturing, construction, communication, transport and health.33 Furthermore, trade between Zambia and China has grown substantially as well. In 2006 10% of the total exports of Zambia were shipped to China.34 Furthermore, the Chinese also provide Zambia with investment loans with low or no interest and support all kinds of projects, such as the construction of hospitals, schools and stadiums.35 The typical Chinese way of investing in Africa via condition-free loans and huge investments in infrastructure is thus visibly present in

Zambia.36 In 2007 the establishment of an economic zone in Zambia was announced, the first of

five planned economic areas in Africa by China, named the Chambishi Multi-Facility Economic Zone.37 China will invest at least US$800 million in this Zone, which will be an industrial park focused on manufacturing and the creation of jobs, but is also located in the mineral-rich Copperbelt province.38

All in all, resource-rich Zambia is experiencing economic growth which is stimulated by Chinese investments. What does this mean for the resource curse? Does China provide Zambia with the opportunity to get rid of its dependence on resources and are Chinese investments the answer to Africa’s development question, a riddle that Western countries were unable to solve in the last fifty years? Or are the features that lead to the resource curse, such as crowding out of the manufacturing sector and corruption, only exacerbated by the Chinese and is this for the moment covered up by a blanket of economic growth? This raises the question if Zambia’s economic ascendance is a temporary success, based on a natural resource boom after which Zambians will find themselves in even deeper trouble when the copper reserves are depleted.

31_{United Nations Conference on Trade and Development, “An investment Guide to Zambia: opportunities and} conditions 2011”, United Nations (2011), 3, http://theiguides.org/guides/ZambiaWebFinal.pdf, visited on October 26, 2011.

32_{Meine Pieter van Dijk, “China’s aanwezigheid in Afrika”, Economisch Statistische Berichten (2007), 585,} http://repub.eur.nl/res/pub/21207/584vandijk.pdf, visited on October 24, 2011.

33

Ibidem 585; Mwanawina, “China-Africa economic relations”, 8. 34_{Mwanawina 14.}

35_{Ibidem 18.} 36

“Zambia and China: anti-Chinese backlash to persist”, Emerging Markets Monitor 3 (2008) 21-22. 37_Ibidem.

(9)

This thesis will examine the influence that the Chambishi Multi-Facility Economic Zone has on the phenomenon of the resource curse in Zambia. The Economic Zone is a good example, because it encompasses the duality that characterizes many Chinese investments: it is directed at job creation and the development of a manufacturing sector, but at the same time the Zone is located in the mining province and most of the manufacturing will be the processing of primary products. Just as any other Chinese investment, it is not clear whether this investment is a form of controlling primary resources or that it will bring economic diversification and jobs.39 Furthermore, this is a huge investment in Zambia and also the first of more planned economic zones in Africa. It is of vital importance to see whether these zones benefit the hosting country or just serve Chinese purposes. Above that, economic zones have brought China economic development: could these zones have the same effect in Africa and provide an efficient way to manage natural resources?

This will be the focus of this thesis and leads to the following question:

To what extent does the Chambishi Multi-Facility Economic Zone influence the manifestation of the resource curse through the economic phenomenon of the Dutch disease and the political phenomenon of rent-seeking in Zambia?

This question is divided in four sub-questions:

 Theoretical framework: what is the resource curse and what are its causes?

 To what extent is the resource curse still present in Zambia and how can the Economic

Zone influence the presence of the curse compared to other factors?

 To what extent does the Economic Zone affect the economic phenomenon of the ‘Dutch

Disease’?

 To what extent does the Economic Zone affect the political phenomenon of

‘rent-seeking’?

(10)

lower economic growth than other countries. Why and how this happens is less clear and there are multiple explanations for the resource curse. This chapter defines which argumentation will be used. The thesis employs an economic and a political logic behind the resource curse, the so-called Dutch disease and the phenomenon of rent-seeking.

The second chapter analyzes to what extent the resource curse is still present in Zambia. The resource curse assumes high resource-dependency and low economic growth; chapter 2 looks whether this is true for Zambia. First, the historical experience of Zambia with the resource curse is discussed, after which Zambia’s current position towards the curse is assessed. This is followed by an analysis of present circumstances in Zambia that might have affected the presence of the resource curse. The Chinese initiative of a Special Economic Zone is singled out as possible antidote to the resource curse, demonstrating what features of the Economic Zone are likely to have an influence on the resource curse.

The third chapter analyzes how the Economic Zone affects the economic explanation of the resource curse. A common economic logic behind the resource curse is the ‘Dutch disease’. This phenomenon describes two effects that can take place after a resource boom.40 First, because of the booming primary industry, labor and capital move to that sector from other sectors such as manufacturing: the resource movement effect. Second, increasing incomes from exports lead to greater spending, which makes products more expensive and causes appreciation of the currency: the spending effect.41 The Dutch disease results in higher costs, reduced external competitiveness and fewer exports of other sectors than the primary sector.42 The main effect is that the manufacturing sector is crowded out, so the economy becomes less diversified and in the worst case starts to deindustrialize.43 This chapter first analyzes to what extent the Dutch disease is present in Zambia and subsequently to what extent the Economic Zone affects the occurrence of this disease and its effects that lead to the resource curse.

Chapter 4 investigates to what extent the Economic Zone influences the political dimension of the resource curse. Scholars who point out that the curse is not just an economic

40

Patrick J. Keenan, “Curse or cure? China, Africa and the effect of unconditioned wealth”, Berkeley Journal of

International Law 27 (2008) 105.

41_{Ibidem 105; Ross, “The political economy of the resource curse”, 306.} 42

Pegg, “Can policy intervention beat the resource curse? Evidence from the Chad-Cameroon pipeline project”,

African Affairs 105 (2005) 4.

(11)

problem describe how a resource boom encourages states to pursue a policy of ‘rent-seeking’.44 Rent-seeking is an activity where somebody is making a profit, without contributing a product or service to society. Natural resources are especially prone to rent-seeking, because these resources just need to be extracted before they can be exported. This creates ‘easy money’, rents, where parties compete for. Rent-seeking can happen within the market, via laws that give privileges to certain groups. A lot of energy and money is lost in lobbying for these privileges. Rent-seeking can also take place outside the market in an illegal manner. The main example of this is corruption.45 Corruption can create huge distortions in an economy.46 Both forms of rent-seeking hurt the economy. The fourth chapter first describes rent-seeking activity in Zambia and then analyzes to what extent the Economic Zone fosters or decreases rent-seeking behavior and thereby blocks or enhances economic growth.

These four chapters eventually answer the question whether the Economic Zone affects the presence of resource curse in Zambia in a positive or negative way. The Zone is either encouraging the Dutch disease and rent-seeking, which means it does not help Zambia to escape the resource curse, or countering the effects of the Dutch disease and rent-seeking, which implies this form of investment might be a way for Zambia to become less dependent on resources and avoid the negative consequences of this dependency.

Much research has been done on Chinese investments in Africa but most studies are quantitative, cross-country studies. This qualitative thesis gives an understanding of the impact of Chinese involvement on a particular country. Zambia is a useful example, as the country has experienced positive and negative developments earlier than most of the other African countries.47 As Alyster Fraser said: “Independence, one-party rule, economic collapse, adjustment, and democratization all came earlier in Zambia than in neighboring countries.”48 Therefore Zambia is the perfect case study for lessons that can be learned from Chinese investments and the establishment of economic zones by China in Africa. It is in particular useful for the development of other

44_{Ross, “The political economy of the resource curse”, 312.} 45

Pegg, “Can policy intervention beat the resource curse?”, 4.

(12)

(13)

Chapter 1 Theoretical framework: the resource curse

“You think we are lucky. I don’t think so. We are dying of indigestion… I call petroleum ‘the devil’s excrement’. It brings trouble. Look around you. Look at this locura – waste, corruption, consumption, our public services falling apart … and debt, debt we shall have for years. We are putting our grandchildren in debt.” - Juan Pablo Pérez Alfonso.49

This statement was made during the oil boom in 1976 by Alfonso, one of the founders of the Organization of the Petroleum Exporting Countries (OPEC), and perfectly reflects the prevailing mindset about natural resources at that time. The common thought was that resource-rich countries were lucky: natural resources used to be - based on common sense and economic theory - associated with wealth and economic development. The wealthy Middle Eastern oil states were the living proof of the enormous income that could be derived from natural resources. Alfonso’s opinion was one of the few that challenged this paradigm.

However, Alfonso was not the first one that doubted the positive effects of natural

resources. For many centuries there has been concern over the impact of resource abundance.50

In the 16th century, philosopher Jean Bodin already suspected a connection between wealth and

sloth.51 Several economists questioned the blessing of natural resource abundance when the Netherlands as a resource-poor country outperformed Spain in the 17th century, despite the latter’s influx of wealth from its colonies.52

Doubts about the effect of natural richness were raised again in subsequent centuries, when the resource-scarce economies of Japan and Switzerland grew faster than the on resources reliant economy of Russia.53 Development economists in the 1950s and 1960s included the concern about the possible negative impacts of producing natural resources in their dependency theory. Raul Prebisch and Hans Singer claimed that countries in the periphery, i.e. the developing part of the world, were mostly primary product

49_{Alan H. Gelb and associates, Oil windfalls: blessing or curse? (Oxford University Press, a World Bank research} publication: New York etc. 1988) 8.

50

(14)

exporters with worse terms of trade than industrialized countries.54 However, until then nobody had used the term ‘resource curse’: the main thought was still that natural resources were a blessing rather than a curse.

Since the 1980s, literature that challenged this idea has been predominant. After the oil booms in the seventies, scholars were curious about the effects of these booms on the economies of the exporting countries and research became more focused on natural resources such as gas, oil and minerals than on primary products in general.55 The first studies mainly concentrated on the macroeconomic impacts of the resource booms, for example Neary and Van Wijnbergen in 1986. Alan Gelb (1988) approached the problem from a political economy point of view, stressing the role of the government in the misallocation of resource revenues.56 He looked at six oil exporters after 1973 and found that these countries were actually worse off than they would

have been without the commodity boom.57 Richard Auty (1993) complemented Gelb’s research

and introduced the term ‘resource curse’.58

At this time multiple studies stressed the paradoxical connection between resource abundance and poor economic growth, but most of them were case-specific.59 In 1995 Jeffrey Sachs and Andrew Warner published the first worldwide cross-country study on the resource curse principle, which clearly showed a negative correlation

between abundance of resources and economic growth.60 Sachs and Warner looked at countries

with a high ratio of natural resource exports to GDP in 1970, the base year, and concluded that in the subsequent twenty years the economies of these countries tended to grow slower than countries without a high level of natural resource exports.61 In other words, countries that heavily rely on the export of primary products, in general experience less economic growth than resource-poor countries. This is the core argument of the resource curse. Sachs and Warners’s pioneering study is often used as one of the basic works for the resource curse theory. In the following years, other scholars also found a contradictory relationship between natural wealth

54

Stevens, “Resource impact – curse or blessing?”, 6.

55_{Ibidem 6. The dependency theorists of the 1950s and 1960s spoke about primary products in general.} 56_{Sachs and Warner, “Natural resource abundance and economic growth”, 9.}

57_{Gelb et.al., Oil windfalls: blessing or curse?.} 58

Richard M. Auty, Sustaining development in mineral economies: the resource curse thesis (Routledge: Londen and New York, 1993).

59_{Examples of case specific studies: Peter J. Neary and Sweder van Wijnbergen, Natural resources and the}

macroeconomy (MIT Press: Cambridge 1986) and Kiminori Matsuyama, “Agricultural productivity, comparative

advantage, and economic growth”, Journal of Economic Theory 58 (1992) 317-334. 60_{Sachs and Warner, “Natural resource abundance and economic growth”.}

(15)

and economic growth.62 When addressing the resource curse, the term ‘resource abundant’ is often used. One should rather say ‘resource dependent’, because what is actually measured is the percentage of natural resources in exports and not the total amount of resources present in a country. However, countries that rely on the export of natural resources are mostly resource-abundant, so the term is not completely out of context.63

The correlation found by Sachs and Warner does not apply to all resource-rich countries, a reason why the resource curse theory has not only advocates but also many opponents. Nevertheless, even though the negative correlation between resource abundance and economic growth is not very strong, masking almost as many resource successes as failure, it certainly suggests no positive relationship between natural capital and wealth.64 Auty stated: “… the resource curse thesis is not an iron law, rather it is a strong recurrent tendency.”65 Another reason why the resource curse is debated, is that there is not one particular causation that explains why resource-rich countries do not benefit from their wealth. Nobody has yet determined the decisive variables that explain why resource abundance leads to poor economic performance. At first, scholars focused on economic explanations for the resource curse such as declining terms of trade, price volatility and currency appreciation. Recently, attention has shifted towards political explanations that concentrate on the attitude of the state and socio-economic changes. Resource abundance is also considered as a possible influence on civil war and regime type.66 The resource

curse theory has evolved from a merely economic problem to a multidimensional phenomenon.67 This chapter gives an overview of the most popular economic and political explanations

of the resources curse and elaborates on the two paths of causality that are used for this thesis - the (economic) Dutch disease and (political) rent-seeking.

62

Examples: Michael Ross, “The political economy of the resource curse”, World Politics 51 (1999) 297-322; Xavier Sala-I-Martin and Arvind Subramanian, “Addressing the natural resource curse: an illustration from Nigeria”, IMF Working Paper WP/03/139 (2003), http://www.imf.org/external/pubs/ft/wp/2003/wp03139.pdf, visited on April 19, 2012; Benjamin Smith, “Oil wealth and regime survival in the developing world, 1960-1999”,

American Journal of Political Science 48 (2004) 232-246.

63_{Christa N. Brunnschweiler and Erwin H. Bulte, “The resource curse revisited and revised: a tale of paradoxes and} red herrings”, Journal of Environmental Economics and Management 55 (2008) 249.

64

(16)

1.1 Economic explanations of the curse

Initially the resource curse was regarded as a problem essentially economic in nature.68 The long term trend of commodity prices, the volatility of these prices and the crowding out of the manufacturing sector as a result of the so-called Dutch disease, form the most common economic explanations for the curse.

Most countries that depend on the export of primary products are developing countries. Generally they have no control over the prices they get for their exports. Prebisch and Singer suggested in the 1950s that prices for commodities would go down in the long run. Due to the inelastic demand for primary products, people would relatively spend less money on primary products when they get richer.69 It would thus be very unattractive for countries to fully depend on the sale of resources. This reasoning was in contrast with the famous theory of Thomas Malthus stemming from the 18th century. He stated that the amount of natural resources is fixed and therefore prices will rise when reserves shrink and demand will grow.70 Julian Simon proved in 1980 that the truth probably lies in between the two theories. Commodity prices follow a cyclical trend: resource scarcity raises prices, next supply, demand and technology respond, which drives prices down again.71 In practice, this seems to be true. When the 1972 Club of Rome report described the growth of world population in combination with non-renewable resources and the oil boom in the seventies, terms of trade were good. Since the early eighties, terms of trade have declined due to a rising volume of primary products exports, debt crises, the fall of the Soviet Union and the Asian crisis.72 Recently, commodity prices are rising again because growing interest of China and India in African resources increases the prices for these materials.73 Scholars thus doubt that long-term commodity prices are an important cause of the resource curse. As the trend is on a long-term basis and is not likely to change overnight, economies had time to adjust and would not face unexpected events. However, this long-term trend may be evident on a global scale, on the country-level it is less clear. Numerous countries

68

Ibidem 8.

69_{Frankel, “The natural resource curse: a survey”, 5.} 70_{Ibidem 7.}

71

Ibidem 9.

72_{Ross, “The political economy of the resource curse”, 303.}

(17)

experience no trend in their primary product prices and they are used to constantly changing prices.74 If commodity prices are a key variable for the resource curse, this would rather be because of their short- and middle-term variation than because of their long-term trend.

Therefore writers such as Auty and Mikesell stated in the 1990s that the real issue was the volatility of commodity prices on the medium-term.75 Commodity prices for natural resources tend to be very fluctuating and when a state’s main income is derived from the export of these unstable resources, this easily transfers to the domestic economy, creating unreliable government revenues and risky private investments.76 It is plausible that volatility hinders sustainable macro-economic management. However, the connection between unstable export revenues and economic growth is not very straightforward. Sachs and Warner concluded that countries still face low economic growth even after buffering themselves against export volatility.77 Although – in contrast to the either positive or negative long-term trend – short-term volatility is ubiquitous, the relation with poor economic performance remains weak. As focusing on the trend and volatility of world prices did not give a satisfying economic answer to the problem of the resource curse, the most popular economic explanation for the resource curse became the phenomenon of the Dutch disease and the resulting crowding out of the manufacturing sector. 1.1.1 The Dutch disease

The term “Dutch disease” was used by the Economist in 1977 referring to the process that took place in the Netherlands after the discovery of North Sea gas.78 The extra wealth that was earned by the Dutch government from the export of this gas led to an appreciation of the real exchange rate and the contraction of the non-resource traded sector.79 First, the term was synonymous with just the appreciation of the real exchange rate, but over time its meaning has expanded.80

The basic model of the Dutch disease was outlined by Corden and Neary in 1982. At the heart of their scheme is a small open economy that produces two goods, one being a natural resource product and one a manufactured or agricultural product, and exports these goods at

74_{Ross, “The political economy of the resource curse”, 304; Stevens, “Resource impact – curse or blessing?”, 10.} 75_{Stevens, “Resource impact – curse or blessing?”, 10.}

76

Ross, “The political economy of the resource curse”, 301. 77_{Ibidem 305.}

78_{Goldstein et.al., The rise of China and India, 69.} 79

(18)

http://www6.bwl.uni-given world prices. In general, the traded non-resource production sector is regarded as the manufacturing sector; however, several scholars pointed out that in most developing countries, this can also be the agricultural sector.81 There is a third non-traded sector, which Corden and Neary call ‘services’.82

The prices in this sector are determined by domestic demand and supply.83 If a sudden demand for natural resources takes place in such an economy, this instigates two economic effects.

First, it causes the resource movement effect, which means that all mobile factors such as labor and capital move to the natural resource sector since the price and consequently the wages in this sector will be higher.84 The manufacturing and non-traded goods sector lose employees and money and contract as a result of this.85 The resource movement effect is not always present: if the natural resource sector uses no labor or/and the manufacturing sector is capital-intensive, only a second effect emerges.86 This effect is called the spending effect. The purchasing power of an economy rises due to the revenues from the booming primary sector, so there will be more

demand for both traded and non-traded goods.87 Since traded goods are dependent on

international prices and excess demand is met by more imports, these prices will not be adjusted.

On the contrary, non-traded goods become more expensive.88 Due to this rise of prices for

non-traded goods relative to those for non-traded goods, the real exchange rate appreciates.89 Again, investment and labor move to either the natural resource sector or the non-traded sector because of the higher prices, which causes the manufacturing sector to shrink even more. Its international competitiveness will fall because the higher prices of non-tradables also impact the production price for manufactures. Rents for buildings and wages become more expensive whereas the internationally set sales price will not rise.90 The input price thus rises while the reward for output stays the same.

81_{Ibidem 6.} 82

W. Max Corden and J. Peter Neary, “Booming sector and de-industrialisation in a small open economy”, The

Economic Journal 92 (1982) 826.

83_{Goldstein et.al., The rise of China and India, 70.}

84_{Sachs and Warner, “Natural resource abundance and economic growth”, 8.} 85

Corden and Neary, “Booming sector and de-industrialisation in a small open economy”, 830. 86_{Ibidem 834.}

87_{Kronenberg, “The curse of natural resources in the transition economies”, 414-415.} 88

Stevens, “Resource impact – curse or blessing?”, 11.

89_{W. Max Corden, “Booming sector and Dutch disease economics: survey and consolidation”, Oxford Economic}

Papers 36 (1984) 360.

(19)

The Dutch disease causes the manufacturing sector to contract and thus leads to deindustrialization: first directly through the resource movement effect and second indirectly through the spending effect.91 Deindustrialization is regarded as something undesirable: manufacturing has been the main catalyst of economic growth since the industrial revolution in the 18th century.92 Nicholas Kaldor established in 1966 an empirical correlation between the growth of manufacturing output and the growth of per capita GDP: the first of his ‘growth laws’ actually says that “manufacturing is the engine of growth.”93 This positive relation can be explained by a number of factors. First, the sector has a higher productivity rate.94 Second, next to static returns, the manufacturing sector also provides dynamic increasing returns to scale.95 Many authors have pointed out ‘learning by doing’ benefits and technological inventions that are mostly accumulated from the manufacturing sector; the primary sector has far less positive spill-over effects on the rest of the economy.96 The importance of the industrial phase and its dynamics is stressed in the ‘leap frog effect’, named by Sarraf and Jiwanji. They prove that moving straight to the heavy industrial phase without a labor-intensive phase has not worked out well in several countries.97 Third, manufacturing is viewed as a source of skilled jobs and the main source of R&D and innovation activities.98 Matsuyama adds to this that less manufacturing

91_{Cordon and Neary, “Booming sector and de-industrialisation in a small open economy”, 831. If the resource effect} is not present, the contraction of the manufacturing sector will be less severe, but the spending effect will still secure a negative impact on the sector.

92_{Adam Szirmai, “Is manufacturing still the main engine of growth in developing countries?”, World Institute for} Development Economic Research (WIDER) Angle newsletter (2009),

http://www.wider.unu.edu/publications/newsletter/articles/en_GB/05-09-Szirmai/, visited on January 30, 2012. 93

Gilberto Libanio, “Manufacturing industry and economic growth in Latin America: a Kaldorian approach”, paper presented at the Second Annual Conference for Development and Change, Campos Do Jordaõ (December 2006), 3,

http://www.policyinnovations.org/ideas/policy_library/data/01384/_res/id=sa_File1/Libanio_manufacturing.pdf, visited on January 30, 2012.

94_{Szirmai, “Is manufacturing still the main engine of growth in developing countries?”.} 95_{Libanio, “Manufacturing industry and economic growth in Latin America”, 4.}

96_{Stevens, “Resource impact – curse or blessing?”, 12. Examples of scholars that mentioned ‘learning by doing’ in} relation to the Dutch disease: Sweder van Wijnbergen, “The ‘Dutch disease’: a disease after all?”, The Economic

Journal 94 (1984) 41-55; Paul Krugman, “The narrow moving band, the Dutch disease and the competitive

consequences of Mrs Thatcher: notes on trade in the presence of dynamic scale economies”, Journal of Development

Economics 27 (1987) 41-55.

97

Maria Sarraf and Moortaza Jiwanji, “Beating the resource curse: the case of Botswana”, World Bank Environmental Economics Series, Paper no. 83 (2001), 4,

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2002/09/24/000094946_02090504023362/Rend ered/PDF/multi0page.pdf, visited on December 10, 2011.

(20)

could also lead to a lower demand for education, as unskilled work is more profitable.99 These reasons all imply that contraction of the manufacturing sector has a negative effect on economic development.

Figure 1.1 summarizes the logic of the Dutch disease. As said before, in most cases the manufacturing sector is assumed to be the contracting sector. Occasionally it may be the agricultural sector that takes the biggest hit. As growth in agricultural productivity is associated with development, the crowding out of this sector is also a negative consequence.100

Figure 1.1: the Dutch disease

* In case of the resource movement effect labor and capital move to the NR sector and in case of the spending effect labor and capital also move to the non-traded sector as a result of appreciation.

This model divides the operationalization of the Dutch disease in two parts. When the presence of a resource boom is established, first the appearance of the two effects is analyzed to see whether the Dutch disease appears. The spending effect is identified by looking at the appreciation of the currency and to what extent this appreciation is caused by rising resource prices. To establish whether the resource movement effect arises, the movement of labor and capital is analyzed. In this context, it is important to understand whether the booming sector demands much labor or operates more as an enclave and whether job-creation in the booming

99_{Stevens, “Resource impact – curse of blessing?”, 12.}

100_{Douglas Gollin, Stephen Parente and Richard Rogerson, “The role of agriculture in development”, The American}

(21)

sector causes labor-losses in the manufacturing sector. Second, the consequences of the disease are assessed. The presence of one or both effects results in a contraction and a loss of competitiveness in the manufacturing sector. The decline of the sector can be analyzed by looking at the absolute size of the sector and the relative size of the sector in total GDP. The loss of competitiveness is examined by looking at the absolute and relative export numbers of the manufacturing sector.

Although the Dutch disease is the most commonly accepted economic explanation, it has been doubted on several occasions. Of course the model is a simplification, assuming full employment and not taking into account international capital mobility.101 The main critique on the Dutch disease as cause of the resource curse is that the phenomenon can be avoided by taking adequate policy measures. Appreciation of the currency can be prevented by employing tight fiscal policy and keeping the resource rent in foreign currency, so that it has less effect on the value of the domestic currency.102 Revenue sterilization is also important: to avoid a huge impact of large resource revenues on the economy, the government can put resource rents into a fund or use them to finance long-term education- or infrastructure-projects.103 Sustainable management of resource rents will have far less impact on the exchange rate than the immediate spending of natural wealth. The government can use resource revenues to prevent the crowding out of the manufacturing sector by investing in productivity, diversification of exports and a dynamic market sector that attracts domestic and foreign investors. Temporary subsidies and tax relief for the non-resource sector can also counter its contraction.104 The Dutch disease is thus manageable when appropriate measures are taken to prevent currency appreciation and to stimulate the competitiveness of the manufacturing sector. Consequently, the real problem of the resource curse is ineffective governance.105 Therefore the political side of the resource curse is also dealt with in this thesis. However, it would be incorrect to dismiss the importance of the economic reasoning with respect to the resource curse completely. It is very important to see whether natural resources do have a negative economic effect in the first place. As long-term terms of

101

Corden and Neary, “Booming sector and de-industrialisation in a small open economy”, 841. 102_{Stevens, “Resource impact – curse of blessing?”, 20.}

103_{Ibidem 20; Van der Ploeg, “Challenges and opportunities for resource rich economies”, 29.} 104

(22)

trade and volatility have not turned out to be the strongest explanations, this thesis employs the Dutch disease as economic explanation for the curse.

1.2 Political explanations for the curse

As more research had been done on economic causes of the curse, it became evident that these causes were not incurable. In the 1990s scholars focused on the question why governments did not take corrective action to prevent the negative economic effects of resource abundance such as the Dutch disease.106 The attention shifted from looking for direct economic explanations to identifying indirect, underlying causes of the resource curse which would explain why the resource curse forms a long-term problem. Although most scholars agree that the resource curse is directly brought about by poor economic policy, opinions differ on the most important indirect causes of this economic mismanagement.107 Political explanations take very different directions. They consider different levels of society by analyzing the troubles of the resource curse.

Behavioralists and rationalists emphasize the behavior of political actors. The behavioralist perspective attributes economic mismanagement to emotional or irrational

behavior of political elites.108 Easy wealth leads to shortsighted euphoria among policymakers.109 In contrast, the rational actor perspective sees political actors as rational utility-maximizing individuals.110 When a resource boom takes place, so-called ‘rent-seekers’ will try to maximize their gain from these incomes.111 According to most scholars political elites are the main problem in this case.112

Historico-structuralists focus on the effect natural resource income has had on the power

of different social groups or classes. They state that this kind of wealth empowers groups that

have growth-obstructing policies.113 Groups that benefit from resource wealth have for example

more leverage to ask for subsidies to protect the internal sector against competing exports.

106_{Rosser, “The political economy of the resource curse: a literature survey”, 14.} 107_{Ibidem 14.}

108_{Rosser, “The political economy of the resource curse: a literature survey”, 14.} 109

Ross, “The political economy of the resource curse”, 308.

110_{Rosser, “The political economy of the resource curse: a literature survey” , 15.}

111_{John-Andrew McNeish, “Rethinking resource conflict”, World Development report 2011 Background Paper} (2010), 6, http://www.cmi.no/publications/file/3852-http-wdr2011-worldbank-org-resources.pdf, visited on December 20, 2011.

112_{Ibidem 6.}

(23)

Seen from a state level, state-centered perspectives do not study behavior of political elites or the relative empowerment of groups, but explore the influence that natural resources

have on the state’s ability to promote economic growth.114

The most prominent example of this perspective is the rentier state theory that states that the government in a resource-rich country is more concerned with grabbing enough rents than with promoting the economy. The rentier state theory assumes the state is the main exploiter of the natural resource and therefore collects all the rents.115 As a result, the state does not need taxation because it has enough income from selling its resources. This leads to an unhealthy financial autonomous position of the state vis-à-vis its people. Furthermore, the excessive amount of rents enable the state to “buy” public support by providing extensive welfare systems.116 The state will not be motivated to make economic or social reforms which leads to economic and technological backwardness.117 Furthermore, the lack of need to extract taxes from the domestic economy makes authoritarian political regimes more likely.118 This theory is therefore often used to explain the lack of democracy in resource-rich countries.

All these different explanations are criticized on numerous occasions. The behavioralist

perspective is mostly used in an ad hoc manner instead of as a clear, testable theory.119 The empowered social groups that promote protectionist policies are also contestable: Sachs and Warner found a very weak correlation between resource abundance and trade barriers.120 The difficulty with the rentier state theory is that most case studies were only concerned with states that were already defined as rentier states, mostly being Middle Eastern oil countries.121 When applied to other countries, the theory does not seem to be very robust. As a result, the most popular political explanation revolves around the flow of rents from natural resources and the quality of institutions.122 This theory of rent-seeking is derived from the rational actor

114_{Ibidem 312.}

115_{Hazem Beblawi, “The rentier state in the Arab world” in Giacomo Luciani (ed.) The Arab state (Berkeley:} University of California Press, 1990), 88. This chapter appeared earlier in Hazem Beblawi and Giacomo Luciani,

The Rentier State (New York: Croom Helm, 1987).

116_{Michael L. Ross, “Does oil hinder democracy?”, World Politics 53 (2001) 332-333.}

117_{Hussein Mahdavy, “The Patterns and Problems of Economic Development in Rentier States The Case of Iran,” in} M. A. Cook (ed.), Studies in Economic History of the Middle East (London: Oxford University Press, 1970), 432. 118_{Ross, “Does oil hinder democracy?”.}

119_{Ross, “The political economy of the resource curse”, 308.} 120

(24)

perspective, saying that people think rationally and follow the path that leads them to the most

income.123

1.2.1 Rent-seeking

The term ‘rent’ stems back from Adam Smith’s division of incomes into wages, profit and rent. Labor creates wages, production creates profit, but rent is earned by simply providing a piece of land or capital to someone. Rent is thus a very easy form of earning money and differs from profit.124 Rent-seeking is in the financial world defined as “the practice of an individual, company, or government attempting to make a profit without making a product, producing wealth, or otherwise contributing to society.”125 Or as The Economist bluntly describes it: “Cutting yourself a bigger slice of the cake rather than making the cake bigger.”126

The phenomenon was described for the first time by Gordon Tullock in 1967, when he identified the welfare costs of tariffs, monopolies and theft.127 The term rent-seeking was coined by Anne Krueger in her 1974 article “The political economy of the rent-seeking society”.128

She explains how rent-seeking occurs in every market economy, because government restrictions upon economic activity create rents. If imports are constrained, import licenses create rents for the lucky ones. People compete for these rents, sometimes in a legal manner such as lobbying, but also in an illegal way, via bribery, corruption, smuggling and black markets.129

There are a couple of reasons why rent-seeking especially forms a problem in resource abundant countries. Natural resources are often ready to be sold without any further value-added production process.130 This ‘easy money’ is likely to corrupt.131 Natural resources are mostly controlled by large companies or the state, lacking a competitive market environment because

123_{McNeish, “Rethinking resource conflict”, 6.}

124_{Adam Smith, An inquiry into the nature and causes of the wealth of nations (Digireads.com Publishing; online} edition 2009) 34.

125

Farlex, “Rent-Seeking”, The free dictionary, financial-dictionary.thefreedictionary.com/rent-seeking, visited on December 20, 2011.

126_{The Economist, “Economic A-Z terms beginning with R”,} http://www.economist.com/economics-a-to-z/r#node-21529810, visited on December 20, 2011.

127

Gordon Tullock, “The welfare costs of tariffs, monopolies and theft”, Western Economic Journal 5 (1967) 224-232.

128_{Anne Krueger, “The political economy of the rent-seeking society”, The American Economic Review 64 (1974),} 291-303.

129_{Ibidem 291.}

(25)

the barriers to enter the market are high.132 Moreover, natural resources are often located in areas that are difficult to access and do not have a strong rule of law.133 This combination of easy money, a few powerful actors and a weak rule of law are catalysts for excessive rent-seeking activity. Rent-seeking can take place in many forms. The activity can be perfectly legal, such as lobbying for higher import tariffs, but in countries where political institutions and the law are weak, illegal forms of rent-seeking often rise to the surface.134 People will look for the most possible gain through shady negotiations, unfair take-overs and crime.135 The most famous illegal form of rent-seeking is corruption.

Rent-seeking is seen as an undesirable phenomenon considering economic growth. Lane and Tornell state that resource gains can cause a “feeding frenzy”, which means that groups will engage in such extreme rent-seeking behavior that the public good will be inefficiently exhausted.136 Their voracity effect is used to explain why rent-seeking lowers economic welfare.137

Lane and Tornell argue that excessive rent-seeking is most likely to happen in countries

with a weak government and strong rent-seeking groups.138 A two-sector economy is considered

with a formal sector, that employs efficient production and is taxed, and an informal sector that is less productive but free of taxation.139 The rate of return is thus higher in the formal sector. Lane and Tornell assume that there are multiple powerful groups and low institutional power. When a resource boom takes place, this will have two effects: first, a direct effect that increases the profitability of investing in the formal sector, and second, a voracity effect that encourages all groups to take a greater piece of the wealth-pie. Consequently, taxes will rise, so capital will be shifted to the informal sector. This redistribution counteracts the direct positive effect and results

132_{Kronenberg, “The curse of natural resources in the transition economies”, 6.} 133_{Ibidem 6.}

134

Van der Ploeg, “Challenges and opportunities for resource rich economies”, 21. 135_{Ibidem 21.}

136_{Carlos Leite and Jens Weidmann, “Does Mother Nature corrupt? Natural resources, corruption, and economic} growth”, IMF Working paper WP/99/85 (1999), 9, http://www.imf.org/external/pubs/ft/wp/1999/wp9985.pdf, visited on December 20, 2011.

137_{Philip R. Lane and Aaron Tornell, “Power, growth, and the voracity effect”, Journal of Economic Growth 1} (1996) 213-241.

138

Ibidem 213.

(26)

in a low growth rate.140 It is comparable to the classical tragedy of the commons: in this case there is too much grabbing of the profits of natural resources, which leads to suboptimal use of the resources.141 Similar theories are developed by other scholars, such as Gelb (1998) and Auty (2001), who explain that weak laws create opportunity for rent-seeking behavior, so that efficient producers will shift to more profitable rent-seeking.142 More rent-seekers mean lower profits for entrepreneurs, which encourage even more producers to engage in ineffective rent-seeking. Rent-seeking becomes more attractive than productive activity.143

Weak institutions magnify the chances that illegal rent-seeking will be employed. Although some research has proved that corruption can sometimes benefit an economy because inefficient bureaucracy can be avoided, in most cases corruption has devastating effects on economic growth.144 Corruption often actually leads to inefficient bureaucracy. It also increases uncertainty around the exact costs and the reliability of an investment and creates other costs, such as money spent on masking the deal.145 Furthermore, profits earned by corruption are mostly invested inefficiently. Bribe money is often put away in foreign bank accounts and not spent in the domestic economy.146 If rents accrue to the political elite, it can be used for bribing voters for support (patronage) and for the purchase of personal items, without any accountability to the state.147 Moreover, investments will decrease as investing becomes more expensive when a bribe has to be paid to start a new business.148 Innovation becomes less necessary to make profit; in some cases actors can even block innovation when they fear it will threaten their privileged position.149

The quality of institutions is often related to rent-seeking. Especially in less developed countries, patronage, corruption and pork barrel projects are more likely to emerge because they

140_{Ibidem 23-24.}

141_{Van der Ploeg, “Challenges and opportunities for resource rich economies”, 20.} 142

Ibidem 20. Other articles on this theory: Ragnar Torvik, “Natural resources, rent seeking and welfare”, Journal of

Development Economics 67 (2002) 455-470; Halvor Mehlum, Karl Moene and Ragnar Torvik (2006), “Institutions

and the resource curse”, The Economic Journal 116, 1-20.

143_{Kevin M. Murphy, Andrei Shleifer and Robert W. Vishny, “Why is rent-seeking so costly to growth?”, The}

American Economic Review 83 (1993) 409.

144_{Leite and Weidmann, “Does Mother Nature corrupt?”, 4.} 145_{Ibidem 5.}

146

(27)

have no adequate institutions to deal with these illegal activities.150 However, there are also signs that the quality of institutions is influenced by the presence of rent.151 Michael Ross developed a theory of rent-seizing, which claims that in order to gain the power to allocate rents, politicians often change institutions in their advantage.152 Not only are bad institutions a variable that make rent-seeking more likely to take place, they are also a result of excessive corruption and patronage. Figure 1.2 shows how rent-seeking leads to poor economic performance.

Figure 1.2: the rent-seeking effect

This is shortly the political argument employed in this thesis. As the model shows, operationalization of the rent-seeking theory starts by studying the quality of institutions. When a resource boom is present, weak institutions can cause these rents to be excessively sought after. Next, the rent-seeking activity is analyzed. This is done by looking at rent-seeking by both the government and other important actors. To determine rent-seeking activities, these actions are divided in rent-seeking within the market and outside the market. Looking for rents within the market is called ‘legal’ rent-seeking and refers to government interventions and lobbying for legislation to create rents. Rent-seeking outside the market, or ‘illegal’ rent-seeking, exists of illegal avoidance of laws and corruption. Both forms of rent-seeking can lead to the crowding out of the efficient production sector and misallocation of money. The loss of efficient production is determined by assessing the size and growth of the informal economy. Misallocation of money is analyzed by examining government spending and auditor’s reports on corruption.

(28)

1.3 Applying the theory to the case

This thesis analyzes whether the new initiative of the Chinese, the Special Economic Zone, can help Zambia to avoid the resource curse. Therefore it is important to first establish to what extent the curse is still present in Zambia. Chapter 2 starts with a description of Zambia’s economic history and considers the current position of Zambia to the curse. As has been explained, the resource curse assumes that resource-rich countries have a lower economic growth. Therefore, chapter 2 examines Zambia’s resource dependency and the economic growth from 2000 to 2010. Resource dependency is measured by the share of natural resource exports to total exports and total GDP; economic growth is defined as growth of GDP per capita and progress on the Human Development Index. Chapter 2 concludes with an analysis of the results and describes how the Chinese Economic Zone can have an impact on these results.

The results of chapter 2 can be deceptive. When Zambia is currently experiencing a resource boom, it is probable that the economy is growing which gives the appearance that Zambia is escaping the resource curse. However, to determine whether Zambia is truly making progress on turning its resources into a blessing rather than a curse, one has to study the presence of the two main causes of the curse as identified in this chapter – the Dutch disease and rent-seeking. When the influence of the Economic Zone on these phenomena is tested as well, a conclusion can be drawn regarding to what extent the Zone hinders or stimulates the presence of the resource curse in Zambia.

Chapter 3 is dedicated to the Dutch disease. First, the presence of the disease in Zambia is established. The spending effect can be discerned by looking at the appreciation of the Zambian currency and the extent to which the price of Zambia’s main export product – copper – has influenced this. The resource movement effect is analyzed by exploring sector employment and investment in Zambia. Next, the absolute and relative size of the Zambian manufacturing sector and its exports are analyzed to establish the consequences of the Dutch disease. Second, chapter 3 introduces the Economic Zone and analyzes whether the effects and consequences of the disease in Zambia are strengthened or weakened by the Zone.

(29)

Zambia’s mining industry, being the government and the private companies, engage in rent-seeking within and outside of the market. After this, rent-rent-seeking in the Zone by the government and the Chinese is discussed to see whether the Zone will change the rent-seeking situation in Zambia for the better or the worse. Chapter 4 ends with a discussion on the effects of rent-seeking, namely the crowding out of the efficient production sector and the misallocation of money. This section also reflects on the consequences of rent-seeking with regard to the Dutch disease. As has been explained in this chapter, the Dutch disease can be prevented when appropriate measures are taken. If weak governance and rent-seeking are widespread, this has serious implications for the Dutch disease.

In sum, this thesis draws a complete picture of the position of Zambia towards the resource curse and determines whether the Economic Zone helps Zambia getting rid of the curse. By not only looking at the presence of the resource curse, but also at the presence of its causes, an in-depth analysis is made that is essential to work towards a policy for sustainable growth. This thesis shows whether the Zone is such a policy.

1.4 Conclusion

The resource curse predicts that resource-abundant countries have a lower economic growth than other, resource-poor countries. However, the theory is not uncontested. This is for a great deal caused by the fact that it is not clear why resource-rich states have this lower growth. First scholars focused on economic explanations, but recently attention has shifted towards political reasons for the curse. Of both groups, this thesis has singled out two main causes of the resource curse: the Dutch disease and rent-seeking. By looking at the causes of the resource curse rather than just establishing the correlation between resource dependency and economic growth, this thesis tries to get to the bottom of a solution to the resource curse and whether the Chinese Economic Zone can contribute to solving the curse.

(30)

(31)

Chapter 2 The resource curse in Zambia

“There is nothing exciting about the re-classification of Zambia as a middle income country.” -

Civil Society for Poverty Reduction executive director Patrick Mucheleka.153

Zambia’s recently acquired status as ‘middle-income country’ contrasts sharply to its title of ‘most indebted country in the world’ in 1984.154

Zambia promoted from a textbook example of the resource curse to one of the fastest growing economies in Africa. However, this does not imply that Zambia has put the resource curse to the past. This chapter analyzes to what extent the resource curse is still present in Zambia. First, the historical context of Zambia is described. This introduction reveals that Zambia has been dependent on copper for centuries and this dependency has had detrimental effects on the country in the past. Second, the current position of Zambia to the curse is analyzed, measuring Zambia’s resource dependency and economic growth. Zambia’s new classification as middle income country already implies that economic growth is present, but has its dependency on copper diminished as well? To put the outcome of this assessment in a broader perspective, the chapter concludes with an overview of the political and economic changes Zambia has made to determine to what extent Zambia’s current stance towards the resource curse can be explained by altered circumstances, such as privatization and democracy. The increase of Chinese influence, and especially the Chinese initiative of Special Economic Zones, is discussed as a possible antidote to the resource curse.

153_{Bright Mukwasa and Gift Chanda, “Nothing exciting about ‘middle income' tag – Mucheleka”, The Post Zambia,} http://www.postzambia.com/post-read_article.php?articleId=22007, visited on January 27, 2012.

The Chinese Multi- Facility Economic Zone

The Chinese

Multi-Facility Economic Zone

in Zambia

A way of escaping the resource curse?

Table of contents

Introduction

Chapter 1

Theoretical framework: the resource curse

Chapter 2

The resource curse in Zambia